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SHLD 36 and change
Store closing costs, lower demand hurt Sears' net
Shares jump as Kmart increased its operating profit the first time in two years
By Andria Cheng, MarketWatch
Last update: 5:50 p.m. EST Feb. 26, 2009
NEW YORK (MarketWatch) -- Sears Holdings Corp. said Thursday profit declined 55%, hurt by store closing costs and lower demand for appliances and other discretionary items.
Shares initially jumped but later fell. Profit excluding items exceeded Wall Street expectations and the retailer said it's closing an additional 24 underperforming stores. The Kmart chain increased its operating profit for the first time in two years.
Net income in the quarter ended Jan. 31 fell to $190 million, or $1.55 a share, from $426 million, or $3.17, a year earlier.
Revenue dropped 12% to $13.3 billion from $15.1 billion, the Hoffman Estates, Ill.-based company (SHLD
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SHLD) , majority owned by Chairman Edward Lampert's ESL Investments, said Thursday.
The quarter's results included a $1.53 per-share cost to write down goodwill impairment at its Orchard Supply Hardware subsidiary and to cover store closing and severance expense; a 7-cent tax benefit; a 3-cent gain on Sears Canada hedge transactions and other items.
Excluding the non-recurring items, the company said it would have earned $2.94 a share. On that basis, it exceeded the $2.59 average estimate of analysts polled by FactSet.
Sears shares closed at $35.54, down 1%.
U.S. comparable-store sales declined 8.3%, hurt by declines in home appliances at Sears and in discretionary purchases such as home goods apparel at both chains. The U.S. same-store sales at Sears fell 11% and dropped 5% at Kmart.
"Many of our large businesses are highly related to the economy and to housing--appliances, tools, lawn and garden, electronics, and fitness," Lampert said in a letter to shareholders. "They are not just economically related, but credit related as well, as they are all big ticket items that are typically purchased on credit."
While the company's gross margin narrowed by 0.2 percentage point to 27.5%, hurt by increased promotions across most merchandise categories. Kmart's margin, however, saw an increase, the first increase since the fourth quarter of 2006.
Sears last year reorganized its business into five units including brands and real estate. The retailer, which owns brands such as Lands' End apparel and Kenmore appliances, is exploring alternative ways of selling its different labels. To bolster demand, the company restarted a layaway program at its Kmart chain during the holidays that it has since expanded to Sears.
Earlier this month it also publicly launched servicelive.com, a site that allows homeowners and businesses to name their prices for a wide variety of services, improvements and repairs. In a letter to shareholders, Lampert said the company is also incubating several new businesses.
Adjusted profit before interest and other items increased 18% to $321 million at Kmart. Sears U.S. division and Sears Canada's profits both declined, which Sears Canada's results being hurt by a stronger dollar.
Challenges
Still, analysts say challenges to Sears remain.
"From a stock perspective, Sears still has cash, has a very strong Canadian franchise, and continues to perform well with Lands' End and its service business," said Credit Suisse analyst Gary Balter. "That implies staying power. Offsetting that, we don't expect Sears to be immune to the weakness we expect at our other retailers."
The analyst also noted that while Kmart's results improved during the quarter, it's still "poorly positioned" to compete against its rivals while Sears is "vulnerable" to market share gains from Home Depot Inc. (HD
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In the letter to shareholders, Lampert also gave an analysis of the financial sector meltdown and defended what he was often criticized as skimping on capital spending for store investments and other things. He said the significant expansion in big box retail square footage and significant capital expenditures by its rivals to open new stores and remodel or expand their shops are being reversed in light of the global economic downturns.
He also said Sears' moves such as reducing its debt by $2 billion since Sears and Kmart merged in 2005 and investing $1 billion in its pension funds have received little credit from rating agencies and that its balance sheet and credit measures compare favorably to rivals such as Macy's Inc. (M
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"Over the past several months, many of our competitors have announced dramatic reductions in their capital expenditure budgets for 2009 and beyond," Lampert said in the letter. "Perhaps they too are recognizing that unbridled expansion and investment rarely yield the types of returns forecasted by analysts and industry experts."
The company said its domestic pension expense will increase by an estimated $160 million to $175 million because of the "severe decline" in the capital markets in the latter part of last year, Sears said.
The company recorded a pre-tax charge of $45 million related to the store closings during the fourth quarter and said it expects to record an additional charge of about $24 million in the first half of the year. Sears already announced plans to close eight other stores and cut jobs. End of Story
Andria Cheng is a MarketWatch reporter based in New York. |
